Johnson On Cotton: U.S. Cotton Getting A Bit More Competitive

    Since the close of Friday, January 10, March futures have gained 4.55 cents through today’s high and its best level since early October 2013. From the seasonal low of 76.65, the March is up 10.49 cts. On the weekly chart using nearby contracts, US cotton futures have not been this high since mid-August 2013, with a rally of 14.35 cts over the past 2 months.

    Both the daily and weekly charts are overbought but by varying degrees.

    The question is not if but when a larger pull-back occurs.

    My technician, Dave, continues to point to the same objective as he has had for the past month. He had the following to say after Thursday’s strong close: “As expected, March Cotton popped out of the recent congestion to the up side. The first hard spot lies at 87.62.”

    Dave’s price of 87.62 is the high made by the March on October 3. Of course, the nearby month may not climb quite that high or may exceed a bit but point being, from today’s high, an initial top is within 50 pts or so.

    Tanzania was dropped by Cotlook due to lack of offers, which makes the Memphis/Eastern quote the 5th cheapest since only 2 of the 4 African/French Zone quotes are allowed with the A index.

    Despite the futures rally going forward, US cotton is becoming more competitive, and higher prices may be required to continue the process of rationing demand over the next several months. The potential for higher flat prices exist, although 88-90 cts should prove to be significant resistance in the second half of the crop year.

    As a reminder, the March and May 2013 contracts traded up to 94.00 before topping out a year ago. However, old crop spreads may not reflect as much. Adding cotton to the board in hefty numbers due to the above mentioned ICE rule change will weigh on the Mar/May spread and possibly May/Jul but without much impact on flat price.

    Merchants need carry in the market and are willing to bring a sizeable portion of cotton to the board to achieve as much. If they are successful with moving enough cotton into cert stocks, the Mar/May should widen to 100-145 pts carry prior to FND, Monday, February 24, 5 weeks away.

    The May/Jul spread will be driven more by the strength of export sales by the end of Q3 (Apr) rather than cert stocks due to fears of overselling supply.

    Whether there are heavy deliveries or not with the March contract, I suspect there will be a strong taker which could set up the potential for a squeeze. If that scenario plays out, traders will be forewarned with the May and a repeat is unlikely. It is far more difficult to make a recommendation on the Jul/Dec spread but as long as the rationing process is in play, the spread should invert further.

    How much (or little) cotton is planted and springtime planting conditions will dictate how well the Dec 14 contract trades from today’s high of 80.00 and if the spread loses ground.

    Sharon C. Johnson, @Copyright 2014.

    The views and opinions offered in this report are solely those of Sharon C Johnson, an introducing broker for KCG Futures. The information contained in this report is taken from sources she believes to be reliable but is not guaranteed as to accuracy or completeness and is sent to you for information purposes only. Reproduction in whole or in part or any part or any other use without permission is prohibited.

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